In January, North Dakota experienced the second largest decline in oil production volumes in the state’s history, and Department of Mineral Resources Director Lynn Helms said the drop was due not only to low oil prices and winter weather but also in anticipation of an oil tax incentive trigger, although some production was curtailed as part of gas capture efforts (see story, this page).
Preliminary data released by the DMR on March 12 show the state’s oil production in January fell by 36,932 barrels per day or 3.01 percent from December averaging 1,190,551 bpd in January. That is only the third time production has declined in the last 24 months (see chart) and the magnitude of the January decline is second only to the 49,766 bpd or 5.1 percent production drop in December 2013. The third highest decline was in January 2013 when production fell by 29,824 bpd, although at 3.88 percent, that was a larger percent decline than in January 2015. Both of those previous record production declines were primarily attributed to severe winter weather, and while weather played a part in the January production drop, oil prices and tax incentives are what primarily drove the drop.
“We had over a week of really cold temperatures in January when it was minus 10 or almost minus 20,” Helms said in a monthly press conference on March 13. “And that, in conjunction with the very low oil prices in January along with the anticipation of tax triggers, led to a huge slowdown in activities.”
Undoubtedly, tanking crude oil prices have led Williston Basin operators to cut back on operations as Petroleum News Bakken has been reporting for several months, and Helms said the January production drop is “really mostly about oil prices.” To quantify that, in December, following months of price declines, West Texas Intermediate averaged $59.29; however, in January that WTI average price fell even more to $47.33.
The trigger effect
But also contributing to the drop in production in January, according to Helms, was anticipation among operators that the larger of the state’s two tax incentives could be triggered in June if crude oil prices remain low through May. North Dakota’s tax incentives are activated when the average price of WTI remains below certain predetermined levels for specified periods of time.
The “small” trigger takes effect on the first day of the month following any month where the WTI average is below $57.50. That incentive applies only to wells completed after that activation date. Under the small trigger, the oil extraction tax falls from 6.5 to 2 percent on either the first 75,000 barrels produced or the first $4.5 million in gross production value over the first 18 months of production. With the January WTI average of $47.32, that smaller trigger kicked in on Feb. 1.
But that’s the “small” incentive. The “large” incentive kicks in when the average WTI price remains below $55.09 for five consecutive months, and that’s looking more and more like a possibility.
In February, WTI gained some strength averaging $50.61 but still staying below the large trigger. In the first half of March much of the February gain was lost with WTI averaging $49.04 through March 13. If the WTI average stays below the $55.09 trigger through May, the large trigger will kick in on June 1, and that large trigger offers far greater tax relief to producers.
First, it applies to all wells in the first 24 months of production regardless of whether they went on production prior to the trigger date. The oil extraction tax for all such wells is eliminated for up to 24 months of production. Furthermore, for all other wells beyond their first 24 months of production, the extraction tax falls to 4 percent. So while the tax incentive would take a big chunk of revenue away from the state (see related story on page 1), it offers sufficient incentive for operators to wait until late spring to put wells on production, and that appears to be exactly what a lot of operators are doing.
Completions backlog
The number of wells waiting on completion, i.e., those drilled but not yet fracture stimulated, has been steadily increasing in North Dakota in recent months, and in January it hit a new estimated high of 825, up 75 from December.
“And you can see that that inventory of wells continues to grow and grow and grow - companies are making the $4 million investment to drill the wells but they’re holding off on the $4 to $5 million investment for the completion until they can see a little bit better oil prices or they can see what the taxes are going to be,” Helms said of the completions backlog. “And so they’re just holding off more and more and more.”
And the completions backlog comes as drilling activity slows. As of March 13, the state’s drill rig count stood at 111, the lowest since April 2010, and down from 133 rigs at the end of February, from 160 in January and from 181 in December. And based on plans that the major drillers have for the rigs by mid-year, Helms said the state’s rig count could fall by another 10 or 11 rigs. “So we see the bottom of this thing at 100 drilling rigs.”
And at that lower rig count, coupled with the increasing number of wells awaiting completion, the state’s production will decline further. “If you compare the December number of completed wells and the (production) increase we saw in December to the January number of completed wells and the production decrease, you can pretty quickly calculate that we need 115 wells completed every month to maintain 1.2 million barrels a day,” Helms said. “So if we are not drilling and completing 115 wells, we will see production decline,” he said.
But that decline could be short-lived. Even if the large trigger is not activated, state law requires all drilled wells to be completed within one year of reaching total depth, and Helms said there will be some 125 wells that have to be completed and put on production in June. So either way, Helms is expecting a surge in production in June, all things being equal. “A lot of that, of course, is going to depend on what the weather does - does it dry out and the road restrictions come off? And also on the availability of frack crews.”
